Time Runs Out

What is the alternative to taking voluntary action to cut back on excessive spending when a government racks up more debt and obligations than it can ever afford to pay?

After a certain point, the alternative is to have action forced upon the government when it can no longer pay its bills with IOUs as time runs out. At least, that’s the lesson that the city of Stockton, California is learning today:

On Tuesday night, City Council members approved a new budget that will guide city operations during bankruptcy and amend a $26 million budget shortfall. With that vote out of the way, city officials could file for Chapter 9 bankruptcy as early as Wednesday, which would make Stockton the country’s largest city to go bankrupt.

The new budget will suspend debt payments, cut employee pay and reduce retiree benefits, allowing this city of about 292,000 residents to continue providing essential services through the bankruptcy process.

We should note that these are all things that Stockton’s city government could have voluntarily chosen to do long before it reached this point, but chose not to do so. As for how Stockton arrived at this point, it would seem that its politicians instead routinely chose to “go big” in pursuing their ambitions:

Stockton was a city with big dreams.

In the mid 2000s, it overhauled its marina, built new parking garages, bought a new city hall, and put up a new arena.

The housing market was on fire, and tax revenues were pouring in, so the city took out $190 million in bonds and loans to pay for the projects.

“Everyone was still living high on the hog,” recalls Bradley Koster, who owned a bar downtown. “On Friday and Saturday night, the hockey team played, and we packed the place.”

But then the Great Recession came to Stockton. Unemployment is nearly 20 percent, and the foreclosure rate is one of the highest in the nation. Tax revenues have plummeted, and the city faces a $26 million deficit. The bank just took back those parking lots and the future city hall.

It’s fair to say Stockton was living beyond its means for a long time, says City Manager Bob Deis, “but it was incremental.”

Deis says Stockton can’t afford it’s boom-time borrowing, because it also has skyrocketing pension costs and city employees who get free health care for life.

Speaking of free health care for life, let’s check in on Greece, where the same lesson is now being learned as the national government of that country can no longer afford to provide excessive government-provided health care benefits, such as free prescription medication for all:

Greeks must pay for drugs until state pays debt-pharmacists

(Reuters) – Pharmacists from the wider Athens region, home to about half of Greece’s population, said on Thursday customers must pay full price for medication until the country’s main healthcare provider pays a subsidy backlog of nearly $1 billion.

State healthcare insurance pays most of the cost of drugs in Greece but pharmacists say the state owes them 762 million euros ($944 million) for drugs delivered on credit since 2011 and they can no longer afford to deliver them without payment.

No matter what, the actions that needed to be taken by governments to become fiscally responsible will eventually be taken. It’s only ever a matter of whether they choose to do so freely, when they still have time, or having the action forced upon them after time runs out.

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